PETALING JAYA: While the reduced volatility in crude oil prices may boost capital expenditure (capex), near-term uncertainties remain in the local oil and gas (O&G) sector, said UOB Kay Hian Research.
The research house noted that Petroliam Nasional Bhd (Petronas) has implemented systemic changes in contract rollouts by focusing on economies of scale and cost efficiency.
“It appears to favour integrated umbrella contracts that combine a suite of offerings spread out across several work packages.
“This may be a ‘silent push’ to encourage consolidation of service contractors,” the research house said in a note.
It said more integrated maintenance contracts could be rolled out by year-end.
The research house noted that since the rollout of the Bokor and Pegaga projects, more large engineering, procurement, construction, installation and commissioning projects such as Kasawari and K5 were on the cards.
However, it said while local contract flow would continue, these jobs were there to replenish orderbooks and “are only sufficient as significant catalysts to selected contractors’ earnings outlook”.
The research house also noted that due to the setting up of Petroleum Sarawak Bhd to control Sarawak upstream and downstream O&G operations, the political uncertainties on oil royalty entitlements and the question of regulatory control between Petronas and the states could complicate contract flows.
UOB Kay Hian Research, which maintained its “market weight” stance on the sector, said Petronas’ move to spend on international projects such as in Mexico, Canada, Africa and India were strong indicators that the oil major was looking to maintain its international edge in the midst of the changing oil and liquefied natural gas landscape.
Locally, it noted that the bulk of the capex spending remained on the downstream segment, mostly in Pengerang.
“While the sale of the Prince Court Medical Centre should help buffer Petronas’ cash position, the oil major continues to remain conservative in view of the various business challenges,” it said.
The research house said it advocated investing in strong international O&G players which have visible earnings upgrades and did not depend on Petronas work orders.
Its top “buy” is Serba Dinamik Holdings Bhd, which it said should see earnings re-rate from a growing orderbook to over RM7bil.
The research house added that it liked floating production, storage and offloading (FPSO) players such as Bumi Armada Bhd on earnings growth once the final acceptance of the Armada Kraken FPSO in the UK North Sea is concluded by second half of 2018.
It also liked Yinson Holdings Bhd, given the company’s long-term earnings re-rating on new projects.
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